Externalities in a life cycle model with endogenous survival

Michael Kuhn, Stefan Wrzaczek, Alexia Fürnkranz-Prskawetz and Gustav Feichtinger

Journal of Mathematical Economics, 2011, vol. 47, issue 4-5, 627-641

Abstract: We study socially vs individually optimal life cycle allocations of consumption and health, when individual health care curbs own mortality but also has a spillover effect on other persons’ survival. Such spillovers arise, for instance, when health care activity at aggregate level triggers improvements in treatment through learning-by-doing (positive externality) or a deterioration in the quality of care through congestion (negative externality). We combine an age-structured optimal control model at population level with a conventional life cycle model to derive the social and private value of life. We then examine how individual incentives deviate from social incentives and how they can be aligned by way of a transfer scheme. The age-patterns of socially and individually optimal health expenditures and the transfer rate are derived. Numerical analysis illustrates the working of our model.

Keywords: Demand for health; Externality; Life cycle-model; Optimal control; Tax–subsidy; Value of life (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (26)

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Working Paper: Externalities in a Life-Cycle Model with Endogenous Survival (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:47:y:2011:i:4:p:627-641

DOI: 10.1016/j.jmateco.2011.08.002

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